Lease Option Purchase Agreement
A buyer may use a lease option purchase agreement to buy a property at a predetermined price. The individual has no obligation to follow through with the purchase. Alternatively, the seller can set a price for the property, receive income and may eventually sell the real estate in the future if the buyer exercises the option.
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Features
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The lease option purchase agreement, also referred to as 'lease purchase or rent-to-own, consists of a lease that gives the buyer the option to buy the property within a certain time at a specific price. The buyer pays a fee to the seller for the option, usually based on a percentage of the purchase price, and the seller credits the payment to the purchase price. The buyer may choose not to exercise the option. In this case, the seller gets to keep the option fee and any rent paid.
Buyer
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The lease option purchase agreement enables individuals to work toward the purchase of a home while building up their credit or down payment. The buyer of the lease option puts down cash that may consist of the first month rent, security deposit and a no-refundable-option charge. Most contracts include a monthly rent credit of as much as 20 percent that the seller applies toward the purchase price. If the property appreciates during the option period, the buyer actually purchases the property at a discount or builds up equity in the home.
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Seller
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If the seller cannot move the property because of a slow market or wants to avoid the tax consequences of selling, a lease option purchase may make the best solution. Typically, many sellers charge buyers rent higher than average for similar properties. The selling price may also consist of a figure higher than if the home sold at the prevailing market prices. This type of tenant usually maintains the property better because of the investment. Often the tenant may not exercise the option because of failure to qualify for a mortgage or inability to put together the necessary down payment.
Warning
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Jack M. Guttenberg, a finance professor at the Wharton School of the University of Pennsylvania, advises buyers to carefully read and make sure they understand any lease option purchase contract they sign because of the unscrupulous sellers waiting for unwary buyers. Some contracts make it too easy for the sellers to evict the tenant, keep the profit and then sign an agreement with another buyer.
Expert Insight
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Bill Bronchick writes on the REI Club website that a buyer should protect his interest in an option purchase agreement by executing the option before a notary or use a "memorandum of option," and record the document in the county's public real estate records. Another suggestion is to set up an escrow account for an "executed deed," which protects the buyer in case of the property owner's death or some other mishap.
The NuWire Investor website states that sellers should use separate lease and option agreements and not to refer to the option in the lease. In addition, obtain a security deposit and make the term for the lease option one year or a right to renew the agreement. For example, if the tenant requests three years, give her one year and a right to renew two additional years. The site also advises sellers to pay the taxes and insurance on the property and to avoid giving large rent credits.
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References
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